Stimulus Act Includes Change to COBRA Benefits
By Ryan T. Neumeyer Under current federal law, employers with 20 or more employees must offer continuation coverage (COBRA continuation coverage) to former employees, their spouses and dependents (i.e., qualified beneficiaries) if they lose coverage due to certain qualifying events, such as a termination of employment. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (Stimulus Act) was enacted which, in part, provides a 65% subsidy of the cost of COBRA continuation coverage for employees who were laid off or terminated for reasons other than gross misconduct. “Gross misconduct” is defined as conduct that is so outrageous that it shocks one’s conscience.
Below is some information that we have been able to obtain as of this point. We will update it as soon as we are able to obtain more information.
When does the Act go in effect?
The COBRA subsidy provisions go into effect on March 1, 2009.
Who is covered?
Persons (1) who involuntarily lose or have lost their employment or (2) have experienced reduction in hours and, at that time, he or she has a vested pension benefit, all or a portion of which is payable by the Pension Benefit Guaranty Corporation (the PBGC). The Act does not apply to other qualifying events such as divorce or an involuntary reduction in hours without vested pension benefits in the PBGC. In addition, in order to be eligible for the subsidiary, an individual's annual income must be less than $125,000 if single or $250,000 if filing a joint tax return.
What does the Act actually change?
For any individual that involuntarily loses their employment between September 1, 2008 and December 31, 2009, and otherwise qualifies for COBRA coverage, the individual will only be required to pay 35% of their COBRA premium until the earliest of:
- 9 months after the first day of the first month he/she is eligible for COBRA;
- the first day he/she is eligible for coverage under any group health plan or Medicare;
- the date following expiration of the COBRA period.
When may qualified individuals elect COBRA?
The Act would allow those individuals who involuntarily lost their employment on or after September 1, 2008, but did not elect COBRA, to subsequently elect COBRA during a 60-day election period. The 60-day period is calculated from the date notification is given to the individual about his/her entitlement to this special election period.
Is the Act retroactive?
No. The Act is not retroactive and will only apply from the date of the law's passage going forward. If a former employee opted for COBRA and begin paying premiums before the effective date of the Act, he or she would not get a credit or refund for the COBRA premiums paid prior to that effective date. Further the Act also does not extend the individual's maximum COBRA coverage.
For example, if an individual, who involuntarily lost his/her job on September 1, 2008, was initially eligible for 18 months of coverage and initially did not elect COBRA, but after 6 months has decided to take advantage of this special election period, the individual would only be eligible for the remaining 12 months of COBRA coverage and not the full 18 months. However, keep in mind that the subsidy is only for 9 months of COBRA benefits.
Are there pre-existing condition exclusions?
No. The Act provides that, for any person who wishes to take advantage of the above-mentioned special 60-day enrollment period, a group health plan may not impose a pre-existing condition exclusion even if there has been a 63-day or more break in coverage from the date of the qualifying event until the date of enactment of the Act.
Can a qualified beneficiary elect different coverage?
Yes, COBRA formally provided that qualified beneficiaries are entitled to elect coverage under the plan of benefits that covered them at the time of the qualifying event. The new law permits plan sponsors to allow subsidy-eligible qualified beneficiaries to elect coverage under plans that cost the same or less than their current coverage, if those benefits are offered to active employees. If their health plan allows it, qualified beneficiaries will have 90 days to decide whether to change their coverage.
Who pays the 65% of the COBRA premiums?
Employers must pay the costs up front and may treat these costs as a credit against the employer's payroll taxes. Plan Sponsors will be responsible for submitting reports detailing the amount of the credit to which they are entitled, as well as an estimate of any future credit they believe they may be entitled to at a later date.
How is the employer reimbursed?
Reimbursement will take the form of a credit against payroll taxes (FICA and employees’ withholding tax) the plan or employer would otherwise pay to the Treasury Department with regard to its own employees.
If the COBRA premium subsidy amount is more than the payroll taxes owed, the rest would be reimbursed by the government in cash. Unfortunately, we do not know yet how this reimbursement will work. The Treasury Department will decide how it works in forthcoming regulations.
Going forward…
- COBRA notice forms and other plan materials must be updated to explain the above requirements. The Secretary of Labor will issue model notice forms within thirty days of February 17, 2009.
- Employers must also promptly begin to identify those individuals who involuntarily lost employment (other than for gross misconduct) from September 1, 2008 until now, and the required notices must be sent to them.
- The qualified beneficiary’s election must be made within 60 days after the notice is provided.
- Of those who have been involuntarily terminated, identify those who currently have COBRA coverage and must be given a subsidy starting with the next COBRA payment period (March 1, 2009 if you use a calendar month as your COBRA payment period).
- Review health plan documents and Summary Plan Descriptions to determine whether they need to be amended.
Summary. . .
- Applies to employees who were involuntarily terminated between September 1, 2008 and December 31, 2009. Any other individuals who may be eligible for COBRA because of a qualifying event other than involuntary termination, are not entitled to the benefits of the Act.
- To be eligible annual income cannot exceed $125,000 for a single person and $250,000 for married couples.
- Former involuntarily terminated employee will only have to pay 35% of the total premium costs.
- Employees who declined COBRA coverage after September 1, 2008 will have the option to re-enroll into COBRA at the 35% rate.
- COBRA notices must be resent by April 18, 2008 to employees who were involuntarily terminated after September 1, 2008.
- The government is funding this program through a tax credit, directly to the employers who must pay the 65% cost upfront.
- Subsidies will terminate if the enrollee acquires a new health insurance plan through another employer or is eligible for Medicare
- Subsidies will only apply to COBRA premiums paid after the effective date of February 17, 2009 and there will be no refund of premiums prior to this date and reduction in cost will be available for up to 9 months.
If you need any further information, please contact Ryan Neumeyer.
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